Does the Math Add Up on American’s Fare Choice Bundles?

More than 5 years ago, in the early days of the blog, I awarded American a gold star for changing its booking interface to show different fare categories. The different categories were superficial at the time with no real product differentiation and that’s why I said that it was a “gold star-in-waiting so we can see what they actually do with this technology.” Five years later, American has finally done something with it. I like the idea a lot, but I’m not completely sold on the pricepoints.

Last week, American announced “Fare Choices” with three different tiers for travel within the Continental US only. The current fares remain as-is under the Choice name. The first buy-up is to the Choice Essential fare for $34 each way, or $68 roundtrip. (American has started displaying prices as roundtrips on its website, so it’s focusing on the $68 cost.) People who are used to flying Southwest will actually find the benefits quite familiar. The Choice Essential fare looks a lot like Southwest’s regular fare.

AmericanChoice Essentials

SouthwestWanna Get Away

$34 each way over Choice

-

1 free checked bag

no change fee

early boarding

2 free checked bags

no change fee

But the similarities don’t end there. American then created a second buy-up into the Choice Plus fare. This one is $10 each way or $20 roundtrip over Choice Essentials (so $88 roundtrip over regular Choice fares.) You’ll find that this looks a lot like Southwest’s Business Select option.

AmericanChoice Plus

SouthwestBusiness Select

$10 each way over Choice Essentials

$16-$28 each way over Anytime

Essentials benefits

50% bonus miles

free same day changes

1 free drink

Wanna Get Away benefits

double bonus miles

free same day changes

1 free drink

early boarding

priority security

In general, I like this idea. Fare bundling doesn’t make sense when you bundle everything into the base fare, but it does makes sense as an add-on. When it’s all in the base fare, you end up giving people something they might not want and making them pay extra for it as part of the fare. (See Southwest and its often higher fares.)

But bundling as an add-on makes a lot of sense because you can make people pay more than they would if they did it a la carte. For example, somebody might pay the $50 roundtrip to check a bag but they wouldn’t pay for priority boarding. Now they might be tempted to pay a little more to get the Choice Essential fare which includes both and a waived change fee as an added bonus.

That’s why this whole thing depends upon the math working out right. Bundling, when done well, can mean more money for the airline and better options for customers. But when it’s done poorly, it just ends up diluting the revenue that’s already there. And I’m not convinced that the price is right here.

Making the Math Work
For Choice Essentials, the early boarding thing isn’t likely to sway a lot of people. It also doesn’t cost American anything, so it’s a throwaway. The real math here is between the change fee and bags. And there are two different types of people that need to be considered.

For someone who is checking a bag at $50 roundtrip anyway, American is betting that he’ll pay $18 more for the right to not pay a change fee. But what American is really betting here is that for every 9 bag-checkers who buy this, only one will make a change. Because it needs 9 people paying $18 roundtrip to make up for the one person who will no longer pay $150. From a bag-checking traveler perspective, it seems like a no-brainer to me unless you’re booking at the last minute and know for sure that you won’t need a change. From American’s perspective, this seems like it should be priced higher.

The other traveler is the person who doesn’t check a bag. The bet here is that she’s more likely to need a change and so will pay $68 on a roundtrip to avoid paying the $150 later. For $68, you’re really only going to appeal to someone who has a high likelihood of needing to make a change because otherwise the price is too steep. But American only succeeds in this plan if less than half the people who buy it make a change. It may be even less than that, because this allows for unlimited changes without a fee. So multiple changers will get an even bigger benefit at American’s expense. For these people, however, I’d say the price might be too high. At this price, you’re only going to get people who expect to have to change and it will be hard to get many others onboard.

Of course, it could be that one group signs up in droves and the other doesn’t. That’s ok too as long as they add up to higher revenue in the end. This is incredibly complex, and I’m only scratching the surface of all the different possible behaviors here. I assume American has crunched the numbers pretty handily – the airline should certainly good at that – but this is really a study in consumer behavior. We can’t know how people will perceive these new pricepoints or how many will buy-up in advance.

The Choice Plus bundle faces a similar set-up. The benefits are pretty minor, so I can’t imagine anyone buying up all the way from Choice to this fare. But since it’s only $20 roundtrip over the Choice Essentials fare, some people might buy it just to get the bonus miles or the $75 same day change fee waived. It probably appeals to the same market that buys Southwest’s Business Select today, and that market isn’t that big. Choice Essentials should be the bigger seller with Choice Plus just some gravy on top.

Implementation Issues
As I said earlier, I do like the idea of trying to get people to buy-up with bundles (and I’ve given praise to Frontier for the exact same thing), but the implementation so far seems to be lacking a little. It was delayed due to tech reasons more than once. That’s not uncommon, but when the multiple delays happen after the press has already been briefed, that’s not good.

And when it did come out, some very important functionality was missing. On AA.com, you can no longer sort by price, duration, etc. American tells me this is on the wish list, but it never made it the first cut. Let’s hope that gets fixed very soon because it severely hurts usability.

There’s also the issue of selling this on the travel agency side. It can be done, so that’s good, but it’s not simple. For those who know travel agent-speak, they filed the fares with a different passenger type, so you have to be proactively looking for the higher fare bundles – they won’t just show up. And of course, the online travel agencies aren’t likely to do anything with this because, well, they generally don’t change even though it’s sorely needed. (Maybe Priceline will since they have a direct connection with American.)

All of this makes you wonder if this was rushed out too quickly – it’s all about timing, right? Anyone want to bet that it’s no coincidence that American management is currently fighting to stay in control of the airline? It’s trying to prove that it can do things differently. This is different, but whether it’s actually a revenue-positive move for the airline remains to be seen. Even if it’s not, the basic idea is a step in the right direction.

25 Responses to Does the Math Add Up on American’s Fare Choice Bundles?

As I recall when AA sent me that emAAil, what I did not like was that you are forced into buying the same (or greater) type of fare for the return as you are for the outbound. There is not a method/option to say “my outbound my change, but the return leg I know to be solid” (and thus get the no change fee on the outbound but the cheaper rate only for the return leg).

David M – Along that same line, American has actually given a gift to travel agents here by giving them something they CAN book that you can’t do on the website. While you can’t change an individual passenger type within a reservation, you can have multiple passenger types for multiple travelers. So I can book one person on a Choice fare, another on a Choice Essential, and a third on Choice Plus all in the same record. American doesn’t allow that on the website – it’s all or nothing.

By the way, I don’t think American would want to allow you to switch to have Choice one way and not the other because the change fee applies to the itinerary, not each segment.

but I wonder when the early boarding is? For most leisure flyers, once First Class, AA Elites, OW elites, then the credit card holders board, there usually arent too many people left over. So if you come after them, but ahead of “group 2″ your boarding position may not change a whole lot as 2/3 of the plane is already onboard.

One thing you ignore in the analysis is the intangible benefit of passengers not feeling like they’re being charged fees left and right, resulting in additional revenue that would have gone to your competition. Of course, this is even harder to forecast than the direct revenue impact of these changes.

For example, take your situation of someone buying up to Choice Essentials because they think that they will have to change their flights. Even if AA loses revenue on this single transaction, because they lose out on one (or more) $150 change fees, this may actually result in customers turning up who would have otherwise booked on DL, UA, etc., choosing AA because in the long run it is cheaper. In this instance AA may view it as a “win” by collecting the incremental revenue of the fare plus $68.

This is exactly why I flew Southwest to college. It wasn’t because they were the cheapest, it wasn’t because I liked Rapid Rewards, it was the flexibility! I knew that on Southwest, when I had a final that would invariably be moved or cancelled, I wanted the flexibility to change flights easily. I could gamble on a lower fare, hoping that my schedule wouldn’t change, but not be punished if it did, especially when making the change weeks in advance.

I hope this trend takes flight, Frontier, AA, WN, are all moving in the right direction. Allowing customers to get a reasonable bundle at a reasonable price, without being forced into an all or nothing situation. But I agree, Cranky, this may need some tweaking in the price or even the offering and how it is sold to really hit it out of the park.

I think you’re right about the pricing. Many regular fliers of AA will have the Citi card that would waive baggage fees for the first checked bag. I’ll pay $20 for “free” changes, but $70 is a bit steep. I travel only for leisure, so it’s not like I’m going to want to make changes to my turkey-day travel plans once booked.

The better question is, will this cannibilize refundable tickets and the outsized profit they provide to many carriers? If you don’t have to pay for changes by simply paying a little bit more, whats the point of paying 3 to 4 times as much for a refundable fare?

Many of the legacies seriously have to ask themselves if they want to continue to serve a market of people that they simply aren’t structured to compete for, at the expense of other fliers who are price agnostic and are mostly concerned about schedule.

I’m rather curious what percentage of fliers actually buy refundable tickets, though. In my experience, many times the cost is so outrageous that it would be neutral for me to buy 2 tickets and only use one. While I lose the ability to get it back in cash, even making it a credit after change fees is usually more beneficial.

I think the industry has long been wrong in its pricing on those tix as it is so high, that they leave incremental money on the table. Perhaps they will eventually evolve the offering to more of an “open ticket” idea where it can be used on any flight within a certain time period with last-seat-availability. This way, it has inherint value, and is distinct from simply no-change fees

Hawaiian and Aloha used to do this with inter island flight coupons. You would buy them at a local travel agency at whatever price they happened to be selling them, and each one could be redeemed for a one way inter island flight. You could call the airline to make a reservation to reserve a seat, but you could also just walk up to the ticket counter to use it. Bank of Hawaii ATMs even sold them for a while.

For business travel? Pretty significant. Due to the vagaries of meetings and the like, often times businesses are changing and refunding tickets frequently which is why they are priced so high. The volatility for the main users of refundable tickets is very risky, and the airlines compensate for that by charging such a high premium.

More importantly buying two tickets is not a feasible option for many. If a meeting is delayed a day, how would buying two tickets help, unless you bought a ticket a day before, a day of, and a day after to cover your meeting “just in case”? Which would, price wise, equal the same as many refundable fares once you figure in the bump up in charge so near the flying date. The great thing about refundable fares is that, depending on the airline, their ticket price can be reapplied anywhere and at the last moment, often times for up to a year from the original flight. Its why companies love them so much; inevitably they can re-used down the line and often times they are for a change in schedules etc.

I give them credit for innovating and experimenting. Perhaps the prices of the bundles will change — that happens all the time in business, as companies test the waters with their initial strategy and make real-time adjustments based on feedback and customer response. It’s nice to see AA “out front” on this trend, at least among the major carriers.

I would wonder about corporate contracts. For instance, I have (many) trips I take on business where the new bundle that eliminates the change fee would be HUGELY beneficial to my company; we’re constantly paying change fees because clients change meeting times, etc., and the bundle would save us money. Yet, my company’s travel portal (through which I am required to book) will only bring up the basic fare. So, I think the big question is, how does AA get this integrated into all of the various portals that corporate contracts are using?

CP – The fares are bookable by any system using the GDS, so it’s a matter of the corporate portals actually being modified to display what’s best. If I were American, I would be wary about this market because the likelihood of change is higher so the potential for revenue dilution is higher as well. But the fare is out there if the big companies can bend their travel policies to take advantage of it. (And if the portals can be modified to allow it.)

Last few times I’ve flown, Southwest is generally the most expensive base fare in the game. Sure, you get a lot included, and I do like Southwest, but there is a reason they only sell through southwest.com–they don’t want you fare comparing.

Jim – I agree with Noah. Southwest is quite often more expensive, so it wouldn’t surprise me to find that American’s Choice Essentials fare is actually lower Southwest’s lower Wanna Get Away fare on a regular basis. That’s the beauty of unbundling – you can offer a lower fare when you don’t include everything in the base fare.

How would this work with corporate travel? If you have a rather stringent plan – you must purchase the lowest priced flat within these parameters, the buyup fees may save the company money will likely not be an “in policy” fare bucket. My guess is this crowd will still fly like they do, and either pay change fees or book late using last minute fares.

These buckets will likely appeal to small businesses and infrequent and unloyal flyers. The AA card makes a ton of sense for free checked bags – and takes out a big perk out of this buy-up.

Eric – I agree on corporate, but it is something that American can negotiate into a contract with a discount of some sort if it wanted to help seal a deal. One thing to note – this isn’t just one free checked bag here. If you already get one through a credit card or elite status, then this is an additional bag. So the benefit is still there, it just might not be as appealing.